Trade wars, explained

"Trade wars are good, and easy to win," Donald Trump said in 2018 – and he has begun his second term launching one against China. But until relatively recently, most of the world was in a continuous state of trade war.

How old are trade wars?

Until the 19th century, mercantilism was dominant in Europe. Mercantilist thinkers posited, roughly, that power came from wealth, and that wealth could be best accumulated by minimising imports and maximising exports. To this end, most nations imposed high tariffs – taxes on imported goods – not least because tariffs made up a very large part of government revenue (smugglers were known as "free traders").

It was a zero-sum view of the world: rival powers all tried to accumulate trade surpluses at once. It led to real wars, such as the Anglo-Dutch wars of the 17th century, and to colonial expansion, as nations vied to dominate trade and to control resources and captive markets for their goods.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

And how did that situation change?

The discipline of economics was invented essentially to challenge mercantilism. Adam Smith argued that nations got rich not by trying to accumulate surpluses, but by exploiting comparative advantages by specialisation, and by the division of labour to increase productivity: crudely, Scotland should produce its own wool, and buy France's wine. By allowing free trade without tariffs, nations make citizens shift resources towards industries in which they have an advantage. After years of debate, in 1846 MPs repealed the Corn Laws (which, at the behest of landlords, had imposed duties on grain imports), initiating the era of free trade.

Has free trade made the world richer?

Yes, massively. Since 1820, GDP per capita has increased from around $1,100 to more than $16,600. Much of this is down to free trade: different nations giving up the attempt to be self-sufficient, buying from others what they need, and specialising in what they do best.

Economists have often been accused of failing to reach clear conclusions, but they very consistently assert that free trade is almost always good for any economy – as a whole. It can, though, be very bad for industries and workers that lose out to global competition. Hence, as Thomas Babington Macaulay put it: "Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular."

Why is it so unpopular?

It is counterintuitive. As Abraham Lincoln inferred: "I don't know much about the tariff, but I do know if I buy a coat in America, I have a coat and America has the money – if I buy a coat in England, I have the coat and England has the money." In rich countries, people fear being undercut by cheaper foreign workers. In poor countries, they fear being outcompeted by better technology.

Free trade also offers "dispersed gains" and "concentrated losses". Letting in cheap Chinese steel to the UK, for instance, makes many groups, from carmakers to consumers, better off. But it's very bad for UK steel workers.

So how did free trade advance?

Broadly, free trade has been pushed by dominant manufacturing powers that thought they could benefit from it: first Britain, then the US. (This is why Karl Marx called it "naked, shameless, direct, brutal exploitation".)

The first era of free trade came to an end when, after the shock of the 1929 crash, US farmers and industry demanded protection. The US, at that point still a reluctant free trader, passed the Smoot-Hawley Tariff Act in 1930, raising the average tariff by some 20%. Other countries retaliated and world trade crumbled.

This is the textbook case for the folly of trade wars: not only does it raise costs for consumers, it also encourages a tit-for-tat response from other nations, causing yet more damage.

When did progress resume?

In 1947, the US and its allies established the General Agreement on Tariffs and Trade (Gatt), instituting a series of elaborate horse-trading negotiations ("rounds"), during which nations mutually lowered tariffs. Gatt and the World Trade Organisation (WTO), its successor, succeeded in bringing tariffs down across most of the world – ushering in the era of globalisation. In addition, most developed nations belong to regional free-trade areas, such as the EU, Nafta in North America, Mercosur in South America.

How free is trade today?

Not that free. The WTO system keeps tariffs low, but allows governments to suspend normal rules to protect their economies in certain cases: market disruption (a sudden surge of imports), national security (protecting defence industries), unfair practices (where other nations' exports are subsidised), and dumping (where firms export goods below cost to destroy foreign competitors). Agriculture remains subsidised and protected in much of the world, to help farmers.

There are so many ways of distorting free trade that low-level trade wars are constantly erupting. And most successful exporting nations, from the US and South Korea to China, have used protectionism to allow key industries to develop.

Are Trump's grievances justified?

When it comes to China, yes. Beijing has ruthlessly exploited the free-trade system, benefitting from lowered trade barriers while keeping its internal market one of the most closed in the world. China heavily subsidises strategic industries (steel, microchips, electric vehicles) to gain dominance; it artificially deflates its currency to cheapen its exports; and steals foreign technology on a vast scale.

Even so, trade with China has benefitted the US overall, leading to lower consumer prices and higher corporate profits. But the "concentrated losses" have been brutal. One study found roughly two million jobs in national industry had been lost in the US between 1997 and 2011, either directly or indirectly, because of Chinese trade. It's no surprise that Trump has found strong supporters in "rust belt" areas where so many jobs were lost.